- Altcoin is short for “alternative coin” and — as the name suggests — is an alternative cryptocurrency to Bitcoin.
- Altcoins have become a major segment of the cryptocurrency markets, with projects like Ethereum (ETH), Stellar Lumens (XLM), and Uniswap (UNI) distinguishing themselves as platforms with innovative capabilities.
- The altcoin markets are characterized for their volatility and are highly speculative investments subject to speculation.
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Since the emergence of Bitcoin, the concept of a decentralized, trustless peer-to-peer (P2P) payment network has inspired an entire class of digital assets. The crypto markets are a product of Bitcoin’s success, and the fast-growing space consists of more than 9,000 altcoins.
Now we have altcoins, which began to emerge in 2011 in an attempt to reinvent Bitcoin, with their own rules and improvements on different features.
What is an altcoin?
Altcoin is a cryptocurrency alternative to Bitcoin — its name is a portmanteau of “alternative” and “coin.” Since Bitcoin is widely regarded as the first of its kind, new cryptocurrencies developed after are viewed as alternative coins — or altcoins. The emergence of altcoins began around 2011, with the first generation formed using the same blockchain engine as Bitcoin.
The first altcoin was Namecoin, which is based on Bitcoin’s code and was released in April 2011. Namecoin is integral to the history of altcoins in that it showed that there’s enough room in the crypto markets for more than one kind of coin.
Blockchains today can run several hundreds of “altcoins,” fueling similar currency projects with unique rules and mechanisms. Altcoins like Ethereum can provide developers with a toolkit and programming language to build decentralized applications into the blockchain.
Understanding how altcoins work
To understand how altcoins work, it’s good to first understand how blockchain technology works — which is where all cryptocurrencies operate.
The blockchain network is a distributed ledger that stores data like cryptocurrency transactions, NFT ownership, and decentralized finance (DeFi) smart contracts. This ledger is often referred to as a “chain” comprising “blocks” of data, which are used to verify new data before additional blocks can be added to the ledger.
This network, on which Bitcoin operates, is groundbreaking because it’s a decentralized, trustless, P2P payment network that functions without a central authority or entity facilitating transactions. And altcoins function on the exact same premise as Bitcoin: to operate using this blockchain technology.
However, there have been some altcoins that have emerged to instead improve on the flaws of Bitcoin or to achieve some other goal. For example, Litecoin was designed by former Google engineer Charlie Lee as a “lite version of Bitcoin.”
Here are the two key things to know about altcoins.
Altcoins are a highly speculative and volatile investment. Speculation is a powerful driver of the crypto markets so it’s important to do your research before investing in any altcoin. Half-baked whims and trading based on rumors are exactly what the experts advise against.
“An emerging technology like crypto is going to attract people of ill-repute who are looking to make a quick buck off of the new investor,” says Ben Armstrong, founder of BitBoy Crypto. “So it’s important to be cautious and not fall for the hype of a slick new project, or get FOMO when you see a crypto asset making new all-time highs.”
The decentralized, intangible, and often misunderstood nature of cryptocurrencies in general makes predicting the long-term, steady success of an altcoin project difficult to predict. Some altcoins, like Ethereum, have maintained their position in the market through constant innovation and the strength of their community. Speculation has a more dramatic effect on newer altcoins. External factors like public perception, Bitcoin price fluctuation, or a meme on Reddit can oftentimes cause drastic price fluctuations.
While the crypto community stands united on its long-term bullish outlook for Bitcoin, the temptation of selling coins for short-term profits is built into the crypto zeitgeist. The crypto community created the term “hodl” in an effort to encourage people to hold on to their crypto assets for the long-term. “Hodl” means “hold on for dear life,” and to resist the impulse of selling when the value of their crypto drops or rises.
Cryptocurrency takes a toll on the environment. Bitcoin’s energy consumption is a well-known flaw. As of August 2021, Bitcoin’s energy consumption is 151.57 TWh according to Digiconomist’s Bitcoin Energy Consumption Index — that’s comparable to what the entirety of Malaysia uses in energy.
The culprit for the tremendous costs of energy lies with the “proof of work” (PoW) consensus algorithm, which is how transactions are verified. And as Bitcoin mining has become more competitive, the computing power required to profitably mine new bitcoins is represented in factories loaded with servers all working toward solving the network’s algorithms.
The PoW consensus mechanism is responsible for driving the competition for faster and more powerful computational processing power. The faster a miner’s computer can complete the formula, the higher their odds of winning a block reward. Over time, miners have developed computer hardware with the sole function of processing the PoW consensus algorithm.
This has evolved from a miner running a program in the background of their PC to entire mining farms. Miners (or a pool of miners) will buy factories in countries where electricity is cheap and fill them with thousands of mining rigs. The energy required to keep the rigs running 24/7, combined with the fans and coolant systems to prevent overheating and fires, has made crypto mining an environmental disaster.
Types of altcoins
Over time, there have been many altcoins that have come along. And now, there are the main types:
- Mining-based: Altcoins that are mining-based are created through the process of mining, like Bitcoin. One example of a mining-based coin is Litecoin.
- Stable coins: These types of altcoins are a new subset to the crypto market that’s meant to reduce volatility. By design, they’re digital assets with their value pegged to fiat and physical assets (off-chain) and crypto collateral (on-chain). Algorithmic stablecoins are not backed by on-chain or off-chain assets, but governed by a smart contract at its core.
- Security tokens: These types of altcoins are a digital or liquid asset that represents an ownership stake in a tangible asset. Stored on a distributed ledger, security tokens are the blockchain-equivalent to shares, but can represent a stake in IP, a car, or property, etc.
- Utility tokens: Once very popular in the 2017 initial coin offering (ICO) boom, utility tokens are not pegged to any currency or tangible value. In exchange for capital in the early stages of an ICO, investors would receive a quantity of utility tokens in exchange for their investment determined by the company or project owner. The utility tokens will serve as a coupon or voucher after funding to purchase goods and services from the issuer.